Clearing the Smoke on Marijuana Facility Lease Agreements

 
With the expected influx of leases for medical (and recreational) marijuana facilities, special attention must be paid to certain issues that would not ordinarily be of concern in a standard retail lease. In light of Michigan’s legalization of medical and recreational marijuana, we are seeing an increase in license holders looking to lease property on which to grow, produce, and store marijuana. The state has enacted strict regulations governing medical marijuana’s production and use, and many municipalities have local ordinances with their own unique requirements. We expect to see the same for recreational marijuana. All these rules, along with the understanding that marijuana remains illegal under federal law, should be considered when drafting or reviewing lease agreements involving marijuana facilities.
 
Below are a few “standard” lease provisions that are worth closer examination:
 
1. Use of Premises. Many leases include a provision that states that the lessee shall only use the premises for legal purposes. While marijuana is legal in Michigan, it is still illegal under federal law, and a marijuana facility is not technically a “legal purpose.” This language will require modification so your tenant is not immediately in default upon signing the lease.
 
2. Landlord Access to Property. Another common provision allows the landlord access to the property under certain conditions. Under the Michigan regulations, however, certain medical marijuana license holders are bound by a rule requiring that access to the facility be restricted to just the license holder, its employees, patients, and caregivers. Similar to privacy concerns regarding medical records in doctor’s offices, unlimited access may not be an option, and other language should be considered.
 
3. Blanket Restrictions on Potential Tenants. Many commercial leases, especially those associated with shopping centers, also include blanket restrictions on the types of establishments permitted. These leases often originated at the time of development and many date back to the mid-twentieth century. As such, they often contain antiquated restrictions on acceptable businesses, such as “head shops,” likely barring a medical and recreational marijuana facility altogether. In such cases, a review of restricted businesses and tenants will be necessary to ensure that a marijuana facility is, in fact, a permitted tenant.
 
In addition to state and federal law, many local ordinances impose requirements on marijuana facilities that must also be considered when reviewing leases. For example, some local ordinances on medical marijuana facilities require the landlord to consent in writing to the premises being used as a medical marijuana facility. This provision is not standard in lease agreements; however, depending on the location of the property and the corresponding local ordinance requirements, a medical marijuana tenant might request the addition of a provision in which consent is granted by the landlord. Adding such a provision to the lease can help streamline the marijuana facility’s process and address any consent requirements that may exist under local ordinances. We expect similar restrictions for recreational marijuana facilities. In fact, certain municipalities may have an outright ban on such businesses.
 
The above noted items , among other medical marijuana licensing requirements, will require special attention when considering a marijuana facility tenant. Regardless of whether you are the landlord or the marijuana business tenant contemplating a lease, be aware that this unique industry poses numerous issues regarding what might otherwise be considered inconsequential lease provisions. It is important to understand the regulations and local ordinances governing marijuana facilities as well as how they affect lease agreements.
 
If you are contemplating entering into a new lease agreement, either as a landlord or the tenant marijuana facility, take a moment – or rather have your real estate attorney take a moment – to consider how certain “standard” lease provisions should be revised based on proposed use of the premises.